Thursday, July 11, 2013

From the Cleveland Fed, the "lock-in effect" -- the inability to move because homeowners are underwater and would lose money if they sold their homes -- was not the cause of "stubbornly" high employment. As they say, the more likely reason that people didn't move to take new jobs was the lack of good job opportunities. Why move if the job opportunities elsewhere are no better than where you are? When jobs did exist, "underwater homeowners are probably more likely to
move than borrowers with equity in their homes":

The Myth of the Lock-In Effect: One story that made the media rounds
during the recession and early recovery claimed that under­water homes —
when people owe more than the property’s value — were deterring unemployed
people from moving to get new jobs. People with negative equity could sell
only at a loss, an option so unattractive that they refused to pull up
stakes in search of work.

It was a good story with a catchy name, “the lock-in effect.” It seemed to
help explain why joblessness persisted so stubbornly during the recovery’s
first fitful years. And it seemed to support data showing that mobility was
declining in the states with the most underwater homes.

But now a team of researchers is spoiling that story, perhaps once and for
all. These economists, including the Cleveland Fed’s Yuliya Demyanyk, found
conclusive evidence that negative home equity is not an important barrier to
labor mobility. In fact, underwater homeowners are probably more likely to
move than borrowers with equity in their homes.

“If a hypothetical unemployed, underwater homeowner gets a job offer, he is
going to take it,” Demyanyk said.

The study was twofold. First, the researchers looked at credit-report data.
The reports gave them enough longitudinal information about borrowers to
infer whether they moved to new regions and whether falling home prices
limited mobility — particularly for people with negative home equity.

Next, the researchers designed a theoretical model to replicate the
experience of real-world homeowners. It churned out results suggesting that
the findings — that underwater homeowners weren’t reluctant to move — were
plausible. Key to the model is the idea that people would rather move to get
a steady paycheck than stay in an underwater home in a place with no job
prospects.

This paper is not the first to debunk the lock-in-effect story. Others,
including work by the San Francisco Fed, have likewise found little evidence
that people didn’t move during the recession because of the condition of
their mortgages.

More plausible is that Americans faced almost uniformly dismal employment
options across the country — opportunities to move for good jobs were few
and far between.

An implication for national policy­makers is that job creation efforts need
not focus on the regions hit hardest by the housing bust. Consider that at
the end of 2009, the under­water problem was concentrated in four “sand”
states — Arizona, Florida, California, and Nevada — and in Michigan, all
with negative equity rates topping 35 percent of total mortgages. If
national policymakers thought only about creating jobs in those states out
of fear that negative-equity borrowers wouldn’t move to other states for
employment, they might be missing an opportunity to lift employment more
broadly.

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'The Myth of the Lock-In Effect'

From the Cleveland Fed, the "lock-in effect" -- the inability to move because homeowners are underwater and would lose money if they sold their homes -- was not the cause of "stubbornly" high employment. As they say, the more likely reason that people didn't move to take new jobs was the lack of good job opportunities. Why move if the job opportunities elsewhere are no better than where you are? When jobs did exist, "underwater homeowners are probably more likely to
move than borrowers with equity in their homes":

The Myth of the Lock-In Effect: One story that made the media rounds
during the recession and early recovery claimed that under­water homes —
when people owe more than the property’s value — were deterring unemployed
people from moving to get new jobs. People with negative equity could sell
only at a loss, an option so unattractive that they refused to pull up
stakes in search of work.

It was a good story with a catchy name, “the lock-in effect.” It seemed to
help explain why joblessness persisted so stubbornly during the recovery’s
first fitful years. And it seemed to support data showing that mobility was
declining in the states with the most underwater homes.

But now a team of researchers is spoiling that story, perhaps once and for
all. These economists, including the Cleveland Fed’s Yuliya Demyanyk, found
conclusive evidence that negative home equity is not an important barrier to
labor mobility. In fact, underwater homeowners are probably more likely to
move than borrowers with equity in their homes.

“If a hypothetical unemployed, underwater homeowner gets a job offer, he is
going to take it,” Demyanyk said.

The study was twofold. First, the researchers looked at credit-report data.
The reports gave them enough longitudinal information about borrowers to
infer whether they moved to new regions and whether falling home prices
limited mobility — particularly for people with negative home equity.

Next, the researchers designed a theoretical model to replicate the
experience of real-world homeowners. It churned out results suggesting that
the findings — that underwater homeowners weren’t reluctant to move — were
plausible. Key to the model is the idea that people would rather move to get
a steady paycheck than stay in an underwater home in a place with no job
prospects.

This paper is not the first to debunk the lock-in-effect story. Others,
including work by the San Francisco Fed, have likewise found little evidence
that people didn’t move during the recession because of the condition of
their mortgages.

More plausible is that Americans faced almost uniformly dismal employment
options across the country — opportunities to move for good jobs were few
and far between.

An implication for national policy­makers is that job creation efforts need
not focus on the regions hit hardest by the housing bust. Consider that at
the end of 2009, the under­water problem was concentrated in four “sand”
states — Arizona, Florida, California, and Nevada — and in Michigan, all
with negative equity rates topping 35 percent of total mortgages. If
national policymakers thought only about creating jobs in those states out
of fear that negative-equity borrowers wouldn’t move to other states for
employment, they might be missing an opportunity to lift employment more
broadly.